Tax rebates for people who "go green" by installing solar panels or wind turbines on their homes or swapping their company car for an electric vehicle will be announced by Alistair Darling tomorrow.
Although his pre-Budget report will include few giveaways as he promises to rein in a £180bn budget deficit this year, The Independent has learnt that the Chancellor will give householders and drivers a financial incentive to play their part in saving the planet.
At present, people who sell electricity to the National Grid are taxed on the income. In future, it will be exempt from tax. A householder on basic rate tax selling £900 of electricity to the grid from April would receive the full amount, instead of £720 as at present.
Only 50 of the 1.1 million company cars in Britain are electric. Mr Darling will encourage firms and drivers to switch to a new range of electric cars costing around £25,000 that will be on the market next year. For employees, electric cars are currently taxed at 9 per cent of the cost price of the vehicle, compared to up to 35 per cent for fossil fuel cars, depending on their carbon emissions. From 2012, the tax rate for electric cars will be 5 per cent, saving a basic-rate taxpayer £750 a year.
National insurance contributions on company cars paid by employers will be reduced on electric vehicles, saving £480 per car a year – £4,800 for a 10-car fleet. Firms will get a cash-flow boost if they switch to electric vans.
Other measures to build a "low carbon economy" in tomorrow's package include a pledge for Britain to fund four carbon capture and storage projects and £1bn additional investment in offshore wind through changes to the scheme under which energy companies must generate a certain amount from renewable sources.
Mr Darling is expected to raise his forecast in April of a £175bn deficit in the public finances to around £180bn. He will blame lower tax revenues from the short-time working introduced by many firms but says that lower than expected unemployment will save the Government about £3bn.
To close the gap, there will be a further tax squeeze on high earners, who will already be hit by a 50p top rate on income over £150,000 from next April. Middle-income groups will also be affected if the Chancellor freezes tax thresholds, drawing more people into the 40p bracket which bites on incomes of £41,175 in the current financial year.
Sources close to Mr Darling denied yesterday that he would adopt a populist "soak the rich" strategy. They said he would stick to his original strategy of ensuring that about 75 per cent of the money needed to halve the deficit in four years is found from spending cuts and about 25 per cent from higher taxes.
The Chancellor is expected to shelve his plan to raise the threshold for inheritance tax from £325,000 to £350,000, enabling Labour to highlight the Tory proposal to increase it to £1m. Although Gordon Brown has been accused of reigniting a "class war" by attacking the Tory plan, a source close to Mr Darling said yesterday: "He is not a class warrior. He is doing what is right for the economy and fair for the country."
Mr Darling will repeat his April prediction that the economy will grow by between 1.25 and 1.5 per cent next year after contracting by between 3.25 and 3.5 per cent this year. But he will insist that it is too soon to abandon the Government's measures to support the economy.
Mr Darling will also promise to defend frontline health and education services but squeeze other departments through a standstill on total spending over the next three years. In an attempt to reassure the financial markets, he is likely to announce some spending cuts but will resist Tory calls for a public sector pay freeze.